The limitations period barred deficiency notices for two tax years. The six-year period did not apply because the taxpayers did not omit 25 percent of their gross income. Gains from PFIC stock sales excluded for the current year (noncurrent year PFIC gains) are not counted as gross income.
Extended Limitations Period
The taxpayers filed returns for their 2006, 2007 and 2008 income tax. But, they failed to report gains from passive foreign investment company stock sales.
After the IRS sent John Doe summonses to a foreign Swiss bank, the taxpayers filed amended returns. The amended returns included the PFIC gains as income. Then the IRS sent the couple deficiency notices.
The couple argued the IRS issued the deficiency notices outside the three-year limitation period. The IRS argued that the extended limitations period applied because they omitted more than 25 percent of the gross income reported on their return.
Noncurrent PFIC Gains
A taxpayer only needs to include current year PFIC gains in gross income. Noncurrent year PFIC gains are not included in gross income. Thus, they are not counted as gross income when calculating any omission for limitations purposes.
For two tax years, the deficiency notices were time barred because the taxpayers
- did not omit from their return
- more than 25 percent of the gross income reported on those returns.
But, for one tax year the deficiency was not time barred because even after excluding noncurrent year PFIC gains
- the taxpayers omitted an amount from the return
- more than 25 percent of the gross income reported on that return.
Also, the taxpayers could not offset gains from the PFIC stock sales with losses from PFIC stock sales to reduce the total taxable gain.
R. Toso, 151 TC —, No. 4, Dec. 61,256